Question 1

An auditor selects a random sampling of tag numbers and identifies the tag with that number attached to the actual inventory. The purpose of the procedure is to

Accepted Answer

A)  obtain proper cutoff information. 
B)  uncover the inclusion of nonexistent items as inventory. 
C)  determine if the client has adequately priced the inventory item. 
D)  verify that the client has not changed the recorded counts after the auditor left the premises.

Question 2

Significant improvements in audit effectiveness and efficiency may be achieved by the use of audit data analytics in the inventory and warehousing cycle.

Accepted Answer

A) True 
 B)False

Question 3

The pricing and compilation of inventory are audited using substantive analytical procedures and test of details of the balances.

Accepted Answer

A) True 
 B)False

Question 4

The auditor's tour of the client's inventory facilities should be led by

Accepted Answer

A)  a member of the audit committee. 
B)  the CFO. 
C)  a plant supervisor. 
D)  the company president.

Question 5

Ratios such as the gross margin percentage calculated as part of risk assessment procedures may be performed using aggregate data.

Accepted Answer

A) True 
 B)False

Question 6

Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility inventory and cost of goods sold being overstated or understated?

Accepted Answer

A)  Compare extended inventory value with that of previous years. 
B)  Compare unit costs of inventory with previous years. 
C)  Compare inventory turnover ratio with previous years. 
D)  Compare current year manufacturing costs with previous years.

Question 7

Given the following information about your audit client, perform analytical procedures and comment on your findings.

Accepted Answer

The answer of Given the following information about your audit...

Question 8

Auditors should design appropriate tests of internal controls over cost accounting records based upon their understanding of those records and the extent they will be relied upon for reducing substantive tests.

Accepted Answer

A) True 
 B)False

Question 9

The audit tests to verify that the client is using an inventory method which is generally accepted and to verify that physical counts were correctly summarized are performed during the audit of the

Accepted Answer

A)  acquisition and payments cycle. 
B)  payroll and personnel cycle. 
C)  inventory and warehousing cycle. 
D)  sales and collection cycle.

Question 10

Inventory is a complex area to audit for all except which of the following reasons?

Accepted Answer

A)  Inventory is often in different locations. 
B)  There are several acceptable valuation methods and some entities use different methods for different types of inventory. 
C)  Inventory is often the largest account on the balance sheet. 
D)  Inventory valuation includes few estimates.

Question 11

The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a

Accepted Answer

A)  sale in the current period. 
B)  sale in the subsequent period. 
C)  purchase in the current period. 
D)  purchase return in the subsequent period.

Question 12

The main difference between job order and process costing systems is that

Accepted Answer

A)  one accumulates costs by materials issued and the other by labor incurred. 
B)  one accumulates costs by individual jobs and the other by particular processes. 
C)  one emphasizes costs accumulated in completed products and the other emphasizes costs associated with work-in-process. 
D)  one emphasizes costs adding value to the product and the other emphasizes costs incurred because of waste, scrap, and obsolescence.

Question 13

In addition to performing analytical procedures that examine the relationship of inventory account balances with related financial statement accounts, auditor's will often use nonfinancial measures in determining the reasonableness of inventory balances. List below at least two nonfinancial measures that may be useful to auditors.

Accepted Answer

The answer of In addition to performing analytical procedures that...

Question 14

Auditing standards recommend that auditors observe physical inventory counts by the client.

Accepted Answer

A) True 
 B)False

Question 15

Management typically allocates overhead using total raw materials as the basis for the allocation.

Accepted Answer

A) True 
 B)False

Question 16

As part of the risk assessment process, the auditor will consider whether any of the identified risks of material misstatement found during the audit of the inventory and warehousing cycle are considered a significant risk.

Accepted Answer

A) True 
 B)False

Question 17

Which one of the following procedures would not be appropriate for an auditor in discharging his responsibilities concerning the client's physical inventories?

Accepted Answer

A)  confirmation of goods in the hands of public warehouses 
B)  supervising the taking of the annual physical inventory 
C)  carrying out physical inventory procedures at an interim date 
D)  obtaining written representation from the client as to the existence, quality, and dollar amount of the inventory

Question 18

The adequacy of internal controls over the physical count of inventory is one of the key determinants of the amount of time needed to test inventory.

Accepted Answer

A) True 
 B)False

Question 19

When auditors observe the client counting inventory, they should be careful to do all of the following except

Accepted Answer

A)  inquire about items that are likely to be obsolete or damaged. 
B)  calculate the unit cost of the inventory items. 
C)  discuss with management the reasons for excluding any material items. 
D)  observe the counting of the most significant items.

Question 20

Auditors need to understand the client's physical inventory count controls before the count of the inventory begins so that

Accepted Answer

A)  the auditors can accurately count and tag the inventory for the client. 
B)  the auditors can make constructive suggestions as to the adequacy of the procedures. 
C)  the client will be informed on exactly what items the auditor intends to test count. 
D)  the auditor can communicate any weaknesses directly to the audit committee.

Exam 21: Audit of the Inventory and Warehousing Cycle

An auditor selects a random sampling of tag numbers and identifies the tag with that number attached to the actual inventory. The purpose of the procedure is to

Significant improvements in audit effectiveness and efficiency may be achieved by the use of audit data analytics in the inventory and warehousing cycle.

The pricing and compilation of inventory are audited using substantive analytical procedures and test of details of the balances.

The auditor's tour of the client's inventory facilities should be led by

Ratios such as the gross margin percentage calculated as part of risk assessment procedures may be performed using aggregate data.

Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility inventory and cost of goods sold being overstated or understated?

Given the following information about your audit client, perform analytical procedures and comment on your findings.

Auditors should design appropriate tests of internal controls over cost accounting records based upon their understanding of those records and the extent they will be relied upon for reducing substantive tests.

The audit tests to verify that the client is using an inventory method which is generally accepted and to verify that physical counts were correctly summarized are performed during the audit of the

Inventory is a complex area to audit for all except which of the following reasons?

The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a

The main difference between job order and process costing systems is that

Auditing standards recommend that auditors observe physical inventory counts by the client.

Management typically allocates overhead using total raw materials as the basis for the allocation.

As part of the risk assessment process, the auditor will consider whether any of the identified risks of material misstatement found during the audit of the inventory and warehousing cycle are considered a significant risk.

Which one of the following procedures would not be appropriate for an auditor in discharging his responsibilities concerning the client's physical inventories?

The adequacy of internal controls over the physical count of inventory is one of the key determinants of the amount of time needed to test inventory.

When auditors observe the client counting inventory, they should be careful to do all of the following except

Auditors need to understand the client's physical inventory count controls before the count of the inventory begins so that